This chapter discusses financing of the US healthcare system. It notes that healthcare spending has increased annually since 1960 and now accounts for nearly 18% of GDP. Funding comes from various sources including private insurance (34%), out-of-pocket payments (13%), and government programs like Medicare and Medicaid (49%). Medicare provides coverage for those over 65 and some disabled individuals, while Medicaid covers some poor populations. The money spent goes primarily towards personal healthcare services like hospital and physician care. Payment methods include fee-for-service, capitation, and value-based models. Despite high spending, over 50 million Americans still lack health insurance coverage.

1. Chapter 5: Financing
the Healthcare
System

2. Introduction
• How much money is spent on healthcare?
• Where the money comes from?
• What the money is spent on?
• How money is paid to healthcare providers?

3. How much is spent?
• Increased HC spending every year since 1960
• In 1980, hc expenditures accounted for 9.2% of GDP; in 2009,
it accounted for 17.6%
• In 1990s, with MCO a break was put on hc cost increases for a
few years
Upward trends caused by (other than utilization):
• Expensive technology-based diagnostic and procedural
interventions at beginning or end of life

4. Where the Money Comes From
Within the System?
• Patient, Provider and Third Party Payer
• Out-of –pocket-money paid directly by the patient
• Charity Care/forgiven debt are the terms that providers use
when they have borne the care of providing care
• Third Party Payers: patient’s employer, private insurance or
MCO, charity organizations, or federal, state and local gov’ts.
• Payers: private or public

5. Private Health Insurance
• Employers through payers
• 64% of Americans have some type of private health insurance
plan-2011
• Insurance companies-for profit or non-profit-BCBS-for profit
• Private health insurance companies paid for 34% of hc
consumption in 2009

6. Out-of- Pocket Expenditures
• Include direct payments to providers for noninsured services,
extra payments for coinsurance and deductibles
• Deductible-flat amount paid that patient must pay out-of-
pocket before insurance company will begin to pay for health
services
• Coinsurance-a portion of total payment that is covered by
insurance that patient pays
• Out-of-pocket expenditures accounted for 13%of national
health care consumption in 2009

7. Gov’t Spending
• Gov’t share prior to the start of Medicare and Medicaid in
1960 was 23% of total. By 1970, it was 37%, and by 1980, it
was 42%.
• In 2009, local, state, and federal programs covered about 49%
of national healthcare consumption.
• Vast majority is attributed to Medicare and Medicaid
Programs

8. Medicare
• First national social insurance program-1960 by President Johnson,
part of “Great Society” program-Medicare
• Originally it provided payment for home health services for persons
65 yrs or older and who were eligible for SS or railroad retirement
benefits
• In 1973, coverage broadened to include those permanently disabled
workers and their dependents, who were eligible for old age,
survivor’s, and disability insurance under SS, as well as persons with
end stage renal disease.
• 4 parts: A, B, C, and D
• Part A: hospital and SNF, hospice and home care
• Part B: supplementary medical insurance, physician and certain
other services
• Part C: Medicare plus Choice (Part C) permits Medicare beneficiaries
to enroll in MCOs
• Part D: Medicare Prescription Drug Coverage Program, designed to
lower costs of drugs

9. Medicare
• Enrollment into Medicare Part D is voluntary who did not
previously receive drug coverage through Medicaid
• Those that are eligible for both are referred to as “dual
eligibles”
• 250$ deductible with a monthly premium of 35$, after the
deductible, Medicare will pay 75% of prescription drug costs
up to 2,250.00$. Between 2250 and 5100, Medicare Part D
provides no coverage. This gap is known as “doughnut hole.”
• After the gap, Medicare pays 95% of drug costs
• Most Medicare beneficiaries use providers of their choice,
paid on a fee-for-service basis
• As payments began to decline as a result of the BBA in 1998,
an increasing number of physicians refused to accept
Medicare

10. Medicare
• Enrollment into Medicare Part D is voluntary who did not
previously receive drug coverage through Medicaid
• Those that are eligible for both are referred to as “dual
eligible”
• 250$ deductible with a monthly premium of 35$, after the
deductible, Medicare will pay 75% of prescription drug costs
up to 2,250.00$. Between 2250 and 5100, Medicare Part D
provides no coverage. This gap is known as “doughnut hole.”
• After the gap, Medicare pays 95% of drug costs
• Most Medicare beneficiaries use providers of their choice,
paid on a fee-for-service basis
• As payments began to decline as a result of the BBA in 1998,
an increasing number of physicians refused to accept
Medicare

11. Medicare
• Hospitals: reimbursed on an episode-of-care basis, amount of
payment determined by a formula (DRG), part of the
prospective payment system
• MCO’s felt that Medicare reimbursement was too low and
dropped 1 M beneficiaries in 2001
• Baby Boomers became eligible in 2010 and the number of
workers available to finance system has declined, funded by
payroll taxes
• In 2002-50% of deaths of Medicare beneficiaries occurred in
hospitals, often after stays in intensive care units, visits to
multiple physicians for treatments to prolong life
• Medicare financed 32% of all spending on hospital care and
22% on physician care.

12. Medicaid
• 1965-is a needs-based program that provides coverage for
some of the poor on a “means-tested” basis-must apply for it
• Only those that have an income that falls below a certain level
• Supported by federal and state levy taxes and is administered
by the states-benefits vary by state
• Title XIX requires a state to provide a set of 14 services in
order to receive federal funds for its program and a
complicated set of requirements for of who can be considered

13. SCHIP
• Clinton Administration
• Coverage for children who are uninsured and who are not
eligible for Medicaid-jointly financed by the federal and state
gov’ts and administered by the states
• Each state determines the design, eligibility groups, benefit
packages, payment levels for coverage, and administrative and
operating procedures

14. Other Gov’t Programs
• DOD, VA, NIH-Federal
• State Public Health and Mental Health Services-State
• Local Public General Hospitals-Local

15. Where the $ Goes
• Most health expenditures fall within health consumption and
most are for personal healthcare (hospital care, physician and
other professional services
• 93.7% for health consumption in 2009
• 6.4% research and investment
• 90% personal healthcare; 7% for gov’t administration; 3% for
gov’t health public activities
• See p. 155
• Older people use more healthcare than younger people
• For men, expenditures start to decline after 18, while it starts
to rise for women
• After 35, it starts to rise for men, catching up to women by 49,
after which both start to rise

16. Where the $ Goes
• Most health expenditures fall within health consumption and
most are for personal healthcare (hospital care, physician and
other professional services
• 93.7% for health consumption in 2009
• 6.4% research and investment
• 90% personal healthcare; 7% for gov’t administration; 3% for
gov’t health public activities
• See p. 155
• Older people use more healthcare than younger people
• For men, expenditures start to decline after 18, while it starts
to rise for women
• After 35, it starts to rise for men, catching up to women by 49,
after which both start to rise

17. Time and Materials
• Hourly payment method is also referred to as time and
materials-provider charged a fixed hourly rate covering all
costs except agreed-on materials, which would be billed as
incurred
• Per diem reimbursement remains a very common payment
method for hospitals-this encourages hospital to work hard to
minimize overhead expenses, payers will always worry that
the hospital is not working for ways to increase efficiency

18. Fee-for-Service
• Common when the scope of work is clear for both sides
• Oldest form of payment for health services and the
predominant system of paying physicians, dentists
• Does not reward provider for better quality, nor do they
reward the provider for steering the patient toward more
efficient services

19. Fixed-Price
• A service is called productized when it can be marketed or
sold as a commodity, which implies that a fixed price will buy a
known quantity of that service
• PPS was adopted for Medicare by the federal gov’t in 1983 for
Medicare Part A benefits as a way to control costs.
• With PPS, hospitals are paid a predetermined rate for each
Medicare patient based on a patient’s presenting condition.
Each patient is classified into a DRG, a preset list created by
the CMS. Hospitals receive a flat rate for the DRG, regardless
of the volume of the actual services provided to a patient
• Provider is rewarded for how efficiently the patient is treated.
Quality is emphasized to the extent that it affects the
efficiency of the treatments for the initial diagnosis.

20. Fixed-Price
• The negative side of this type of system is that it intrinsically
rewards providers who exaggerate the reported severity of
the diagnosis-”upcoding”

21. Capitation
• Is a fixed prepayment per person to the healthcare provider on an
agreed-upon array of services. The payment is the same no matter
how many services or what type of services each patient actually
gets.
• Encourages the selection of the least expensive treatments as well
as promote services likely to result in the lowest overall cost during
the contract period.
• No reinforcement for planning the long-term health of the patient
• Global budgeting-a payment method common to government-run
facilities/simplified form of capitation, only with one payer. The
provider receives a global budget, which must cover all costs of
treatment needed by the eligible population. This is the common
way of paying for VA hospitals, state mental hospitals and local
health department clinics

22. Value
• Value-based compensation is the payment model in which the
performing organization is rewarded for the value delivered
• Value-based systems are most often used when the value is
easy to measure and indisputable

23. Third-Party Payers (Risk
Management)
• People do not buy health insurance to insure their health but
rather to insure their ability to pay for healthcare and obtain
healthcare in the event that their health status changes
• The real motivation for having third-party payers is to bridge
the gap between how people want to pay for healthcare and
how third-party payers want to be paid
• A third-party payer adds value by converting a stream of
monthly payments into a stream of service-driven or ailment-
driven payments to providers
• To maintain this conversion, the third-party payer maintains a
network of providers with which it has negotiated contracts.
These contracts detail which payment models will be used and
what rates will be used, as well as other details common to
commercial contracts

24. Conclusions
1. US spends more $ on healthcare than any other country in the
world, both on a gross basis and a per capita basis
2. US has a uniquely complex financing and payment system
3. We crank dollars through the system, which requires enormous
amounts of eligibility determination, benefit checking,
coinsurance/deductible calculation, preutilization authorizations,
collections
4. Mountains of paperwork are created and telephone calls made.
Huge number of staff are needed to carry out these activities.
5. In addition to the high cost of administration, the US healthcare
still leaves many people without health insurance and, therefore
with reduced access to healthcare
6. In 2009, more than 50 million Americans had no healthcare
coverages

25. Conclusions
• The lack of coverage has many negative consequences:
-personal anxiety
-increased use of emergency rooms
-growing personal bankruptcy rates